It’s the Economy, Stupid…

“…most of the people …were unhappy… Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn’t the small green pieces of paper that were unhappy.” – Douglas Adams.

Or to put it another way, there is nothing wrong with the Euro as a currency and plenty wrong with how much debt we expect our economies and our households and our taxpayers and our citizens to bear.

As a medium of exchange and a unit of account the Euro has been a complete success. As a store of value it is facing some challenges.

These challenges arise from the fact that we Europeans have misvalued our property assets by a considerable margin and the wealthiest of us are trying to get the poorest to bear an unfair share of the burden of those mistakes.

The property mis-valuation occurred at a time when the German economy was in the doldrums, post re-unification and post the ‘DotCom bubble’. German bankers and bondfund managers were getting very little return on their Euros in the German economy. It was perfectly natural for them to seek investment opportunities abroad, especially as the newly minted currency made it easier to measure, price and transact business opportunities.

What was not perfectly natural was for them to forget the rules of prudent investing, to mimic what US and UK banks were doing and to ignore what external advisors were telling them. But as the erstwhile chair of Citigroup, Chuck Prince so neatly expressed “You’ve got to keep dancing while the music plays!”

That the regulators in the EU and domestic economies also abandoned their responsibilities and let the music play at an ever faster tempo at the same time is perhaps just another case of hubris in the postpartum roseate glow of the newly arrived Euro. But that does not excuse their trying to shift the blame for the coming of Nemesis.

The Euro was and is well designed. It is a fine piece of engineering, built largely by the French and the Germans, who know a thing or two about building. But the Euro is the financial equivalent of a car, not a plane or other anti-gravity device. By refusing to use it in the way it was intended to be used and by refusing to keep national debts and deficits in check by the fines and other mechanisms built into the Euro design the politicians and bureaucrats have made fools of themselves and a mockery of the patient efforts of two generations of statesmen.

What they have done is the equivalent of driving it off a cliff. What they are doing now is the equivalent of trying to ……well, actually I don’t know what they are trying to do because they keep changing their minds. First, it was guarantees, then it was bank recapitalisation, then it was austerity, after that it was a ‘unique bond transaction with retrospective contract changes’ and now it seems we are to have ‘austerity with growth’….

If a country has too much debt or is paying its civil servants and other non-exporting workers too much in salaries and benefits then changing currency in order to partially writedown those debts and reduce those costs is the equivalent of shooting yourself in the foot in order to learn to hop.

The point that I wish to get across is that the fault is not with the Euro and is entirely with what burdens our economies are trying to carry. Abandoning the Euro does not solve Greece’s problems or anyone else’s. It most cases it will make them worse because the dislocation effects of the ‘defenestration’ and because of the knock-on effects in the wider EU.

The borrowers are being made to suffer because of the mistakes and the greed of both the borrower and the lender. This is business and it turns out to be ‘bad business. There is no moral superiority of the lender over the borrower. Both are equal parties to a contract, willingly if stupidly, entered into. Making Greece jump through hoops to save the blushes of greedy bankers and feckless regulators and stubborn politicians will be fun while the ‘wheels are still turning’

If Greece abandons or is forced out of the Euro the debts of Greece will still be denominated in Euro’s and the only thing that will have been achieved will have been to make it harder for Greece to get Euros to pay us with.

Returning to my car analogy I will close with another Douglas Adams quote about going over a cliff….
“It’s not the fall that will kill you, it’s the landing….”

This post originally appeared on the TASC blog on Friday, 18th May, 2012.

An Awkward Question…

I have an awkward question for which I do not have any answer and would value some comments and opinions.

I support the campaign to eliminate all forms of discrimination against people on the basis of their race, creed, gender and sexual orientation.

Currently, the ‘hot topic’ in this field is the need to reform the civil contract of marriage so as to open it from being only between 1 man and 1 woman to being between any two people.

But, I ask myself, why, if we are giving up the prescription for gender, are we not giving up the enumerative prescription? That is, why are we limiting it to just 2 people.

Why cannot say 3 people or 4 people pool their assets for common support and cherishing?

Only askin’…..answers on a postcard, pls.

(Yes, this is a whole new ‘can of worms’, isn’t it….)

Loose lips sink ships….

The “grown-up’s” will remember the opening sequence to the ‘Mission Impossible’ TV series, where the tape self destructs a few seconds after being played.

I have sad news for you. That technology has not been perfected.

So … There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank’s ATMS disappear in a puff of smoke.

As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the “Euro”. Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to “shouting ‘Fire!’ in a crowded cinema”.

Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of “fags” and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal “dressed as lamb”. We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.

And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.

Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can’t happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person’s usage of it or to the French Government’s usage.

Finally, the concept of ‘leaving the Euro’ is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.

If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).

Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what ‘legal tender’ would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to ‘NewPunts’ or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for ‘real stuff’.
And what would we get in exchange for all that trouble? Only the opportunity to say ‘We can’t pay you back everything we owe you’.

I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would ‘run dry’ if there were to be a default.

To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.

The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the ‘Growth and Stability Pact’ is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.

The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can’t do that. But a debt ‘haircut’ amounts to the same thing.

So, can we please take a haircut now before we all go bald?

(This article first appeared on the TASC blog on Mon, 13th Feb. ’12.

Coming back ‘online’…

Five months since my last blog.

Forgive me, reader, for I have been preoccupied.

I was conducting a ‘dialogue’ with the Department of Finance with respect to the ‘Offset Debt’ proposal (Link) and I decided to keep “shtum” for fear of upsetting the tender sensibilities of those I encountered therein.

I will give an account of my adventures in that ‘Wonderland’ in a little while. The story is not fully done and I am, currently, too close to the events to be able to give a dispassionate account. (Begging the question of whether one’s blog should be ‘dispassionate’…)

Jumping out of my own navel and surveying the landscape, I can see that nothing has changed and everything has changed during the tumultuous 5 months while I was silent.

The various economic and financial ‘cans’ (EU, UK, US, Chinese) have all been repeatedly kicked down the road. Each kick has been a little weaker and delivered with less conviction and the ‘cans’ are deteriorating and the end of the road rapidly approaching.

In the EU, particularly, the austerity path to growth has clearly failed but in the run up to Sarkozy’s election Ms Merkel will try to maintain the fiction that ‘all is well’….and why wouldn’t she while the world wants to pay to be allowed lend her money. But whether they can whip up a functional treaty in 60 days to fix the dysfunctional Masstricht and Nice and Lisbon treaties that took decades to construct is another matter altogether.

In the US the figures seem to indicate a very modest recovery and I won’t rock that boat …though I won’t bet the farm on it either.

The UK is in some form of economic limbo, kept alive by cash transfusions from the distorting parasite that is the City and Mr Cameron is having to juggle with the possibility of Scottish independence in order to distract the populace and the markets until the feel good factor of the Olympics and the Jubilee arrive. His non-veto of the latest EU contortions will have to await the new treaty before he can dip his toe back in those waters. But he should not expect a warm welcome for any form of ‘I told you so’, so beloved of past UK PM’s.

Meanwhile, the “oh! so different” home life of own dear Taoiseach continues to circle the plughole. We are enduring a “tale of two economies”, whereby the domestic one is drowning and is barely kept afloat by the exporting one. The enduring is not likely to continue for much longer though.

Brace for impact!

Grandmaster level chess

In chess, the quality that separates the ‘grandmaster’ from the ‘talented amateur’ is the number of moves ahead that each player can mentally keep in mind and manipulate. Something similar is said to be true for champion tennis and snooker players.

I am not one for conspiracy theories as experience has to date shown me far more evidence supporting the ‘Murphy’s Law’ theory of management of human affairs.

None the less, there are in all realms, whether jurisdictional or professional, at any given time a handful of competent persons with both a breadth of vision and a depth of ability.

The ‘European Project’ was built by men widely adjudged to be ‘political grandmasters’. Adenauer, de Gaulle, Brandt, Mitterand, Delors; none of these were, or are, regarded as vain or shortsighted or incompetent. Patiently and with great care and at considerable cost and in the face of much dissent, the various layers of the EU have been put together.

Yes, there have been many compromises and the ‘project’ is far from complete and the final form is not clear to anyone. But there was a vision behind the efforts of these men and there was, most certainly, a bitter awareness of what the possible costs of failure could be and what the outcome of failure would look like.

In the context of all that wisdom, ability and effort we now have to re-examine the crisis that envelopes the ‘European Project’. The ‘design flaws’ in the single currency were clearly enunciated before its adoption. The bumpy evolution of the ERM gave ample warning of how tough life might be for some members of the monetary union.

The driving ambition of the proponents was not merely to enhance European trade or the reduce the profits of foreign exchange traders. They did not seek some empty token of pseudo-unity for Europe.

What they wanted was a means of preventing a repetition of the abuse of power and the greedy expropriation of financial wealth that the US imposed on the rest of the world when it unilaterally and with warning or dialogue abandoned the Bretton Woods agreement in 1971.

The only way to achieve this would be to build a currency with the strength and depth of the ‘mighty dollar’.

That level of integration has always been regarded as politically impossible to achieve and, in many ways, has been ‘tabu’ to both those who would propose it, as well as to its instinctive opponents.

Nobody ‘walks the plank’ out of choice. Standing at the end of the plank, one jumps into the water because certain death awaits at the other end and there is some hope, however slight, amongst the fish and the sharks.

The designers were well aware of the risks and the flaws of the design of the Euro. They had knowledge of, and personal experience of, financial disasters of national and supra-national scale and impact. A crisis of the type we are currently dealing with was inevitable with only it’s timing as a matter of debate. Almost certainly it has come sooner than most observers expected and has probably been brought on and exacerbated by the US debt crisis.

We are now hearing calls for the ‘federalization’ of problem debts from predictable and from most unlikely sources. Of course, no one mention the corollary of this federalization which would have to be federal tax raising powers. At which point the EU project would be complete.

There is an alternative to the disintegration of the Euro and the EU as a solution to the unviability of the debt mountain that has been piled high in the storehouses of Europe. And as solutions go, while unpalatable to many, it looks less painful than the alternative.

So I leave you with this thought and a quote.

Did the designers of the Euro hope to achieve, through a crisis, a level of European integration that would never be possible by normal negotiations?

“And whether or not it is clear to you, no doubt the universe is unfolding as it should.”
- Desiderata by Max Ehrmann

DD,SS.

Greetings and apologies for the long silence. It was engendered by a preoccupation with other delusions and a generalized despair at the “state o’ chassis”.

My congratulations to EK and the gang on an interesting victory.

EGilmore shot himself badly in the foot at the start of the campaign with his arrogance toward the electorate in general and, again, in the immediate aftermath with his arrogance towards women in particular.

I have much to say about FF and the Greens but I was taught not to speak ill of the dead.

EKenny ran a careful campaign, much mocked but perfectly rendered and made a fine, indeed a very fine, speech on assuming office. It transcended most people’s expectations of the man and the moment.

Sadly, I fear that such transcendence will be short-lived. EK is already being slapped around by his EU seniors. Overall, the situation reminds me of the inauguration of BObama. The situation is extremely parlous and almost all options have been squandered by the outgoing administration, making the task of the incoming administration Sisyphean and bound to disappoint.

Lets face it, folks. He cannot walk on water, despite our hopes and ambitions for him. He has been dealt an impossible hand and in the coming months I will not condemn him for not being a miracle worker nor any of his colleagues.

We are riding the whirlwind now.

Good News?

There is little new under the Sun and precious little of that is good news but the uprisings in the Middle East are both.

They are novel in that they genuinely seem to be popular uprisings unmediated by elites or provocateurs. They are good news for those of us who believe liberty and self-determination.

It is a measure of American hypocrisy that after 30 years of expensively propping up the Egyptian client dictatorship that they are now urging accommodation and reform while keeping the money spigot flowing. It may also be a measure of American weakness that they have so quickly jumped on the bandwagon.

There are always concerns about how these uprisings evolve. If they descend into revolutions then it becomes impossible to predict the outcome as all sorts of opportunists interfere and manipulate to suit their preconceived agendas. If they lead to bloodless displacements, as in Tunisia, then we may hope for the best.

I believe that once freedoms are granted they are very hard to remove save in cases of near complete state failure such as Afghanistan has endured for 30 years. So, let us hope for swift and bloodless popular coups everywhere that American satraps have lingered for so long and that Arabs can show Bush et al. what ‘Let Freedom Reign’ is really about.

It would certainly be wonderful to see another ‘domino effect’ of dictatorships toppling in succession as we saw in 1989. There is unlikely ever to be a better time for the Arabs. America is weak in blood and treasure after two stupid wars and a property bubble. Russia has not fully recovered and China has not yet established itself.

I don’t think this good news for oil consumers, though.

More Farces

It is 15 months ago since the GreenParty held a Special Convention on PfG/NAMA.

I told that Convention that I did not believe that any of the lovely promises offered to them as the payoff for sustaining FF in power and agreeing to NAMA would be delivered, let alone the fact that they were not worth the price that NAMA was being quoted at, let alone the price that NAMA was going really cost.

The vocal minority that I was proud to be a part of lost that argument.

Today, after the Greens have bolted from a Government that they solely had enabled, we have been proved wholly correct.

There is no ban on corporate donations, there is no Climate Change bill, the incinerator is still going ahead. In the last year the Greens have passed an EU mandated change to marriage contracts, a change in dog breeding and deer hunting laws and, erm, that’s about it.

The cost has been the utter loss of our ‘reputation’, the emptying of the State coffers and the exodus of the young.

Green incompetence has cost them dearly. Showing their hand in November started the avalanche of resignations and other electoral posturing that has derailed their legislative agenda and the entire Government with it.

Now we are being offered a General Election.

This GE is a much of a farce as the machinations which have led to it. Elections are usually fought (and ought to be) over what direction the voters think that the country ought to go in over the coming years from between the choices offered by the competing parties.

But what alternatives are on offer to the people – FF, FG and Lab are all endorsing the G’tee, NAMA & the EU/IMF bailout. There is nothing for the people to choose from. There is nothing to do except settle down and pay bills for 10years or emigrate.

The Greens, despite their much vaunted democratic principles, have robbed the people the chance to choose their destinies and are now forcing the timing of the peoples rubber stamping of the Greens arrogant choices on the people’s behalf.

The best thing that could happen would be the abandonment of the Finance Bill and someone, anyone, offering a policy of burning the bondholders and repudiating the Guarantee. It would be painful but it would be a lot quicker than the pain we are going to endure over the next decade. The most important thing is that it would be sure. The economy would be repriced to competitive levels (back to 2000) and we could stop being the source of Europes debt-gangrene.

Good luck now.

Qui bono?

Once again I was wrong because I did not think ‘things’ could get any stranger.

Mr. Cowen has resigned as leader of FF but intends to remain as a caretaker Taoiseach, all the while citing the benefit of the Nation principally and his party secondarily as the intended beneficiaries of his actions.

But who can possibly gain from this refusal to go on drinking from the poisoned chalice of the Taoiseach-ship?

Any new leader of FF will not be able to bring about any changes of policy because they will not be in office and have scant chance of it after. But to announce new policies will mean repudiating the work they did and supported immediately heretofore.

The new leader will be tarred with the brush of these current failures as well as the unlamented and lamentable Mr. Cowen. So FF will suffer a double loss of leadership over their current incompetence, which is possibly no more than they deserve but is still not helpful for them.

Legally, there should be no obstacle to the idea of the Taoiseach not being the leader of the largest party but the semiotics of this at this juncture are unhelpful. The people and the markets need to see a steady firm hand on the tiller and at this stage a dead hand is preferable to a skittish new unpredictable one.

Mr. Cowen should have done his duty and continued to quaff deep draughts from the poisoned chalice that is his Taoiseach-ship. Instead, he has added to the count of bungled maneuvers and bolted when the normal political processes needed to be reaffirmed and have him stay on to take his reprimand from the people.

Despite all his protestations, this maneuver has be undertaken for the benefit of his party primarily. It will shortly be seen as such and will be another nail in the coffin of FiannaFail. The only remaining issue is how many more will it take to ensure that the beast can finally be buried for evermore.

New Year’s Wish

Greetings and a happy New Year.

In an Irish context, the ‘and prosperous’ addition to the traditional salutation is inappropriate. I have been shocked at the number of people who have contradicted or corrected me when I used the full traditional form of the greeting. Clearly, a very sombre mood has settled over the country as everyone now realizes the scope of our problems and uselessness of the ‘remedies’ applied so far.

I have spared the readers (all 6 of you, according to Google) any mutterings over the festive season mainly because I was having some fun but also because events were moving so fast and so farcically that any comment of mine was superfluous.

On the cusp of the Fianna Fail ‘heave’-let I have little to say that has not been said before by me and better by others. The old are eating their young in Ireland or at a minimum the hopes and dreams of their young. It is a terrible Swift-ian nightmare that we are living through with vampire banks, zombie political parties and predatory priests roaming the land.

But it also true that people get the politicians they deserve. FF were voted in in 2002 and in 2007. Legally, they have done little wrong apart from a consistent negligence but there is no court that would convict them.

The morality of their conduct is a moot topic when it comes to political parties in general and FF in particular but one can say with some certainty that they had no mandate for the changes they have imposed on the electorate and they have gone to great lengths to avoid seeking one.

My own party, the Greens, make themselves more hypocritical and farcical by the hour. Lately, they have described themselves as ‘semi-disengaged from Government’ while desperately propping up the Government and staving off the General Election in order to drive through legislation that is of concern only to themselves. Pontius Pilate was never this good at public hand wringing/washing.

The short term outlook is worsening by the day.

Capital is fleeing the country at an accelerating rate. The Central Bank is resorting to stratagems that would be considered fraudulent in any other bank. Inflation, through the price of energy, is increasing. The General Election seems sure to be a repeat of 1983 with an inconclusive result dominated by ‘independents’ and unlikely to be stable or enduring.

I sent out a New Years greeting to friends saying that “I wish you all the health, strength, luck and pluck needed to face the coming challenges and that you may end the year with more friends than you start with.” I repeat that good wish to those of you who did not get it via SMS.

I wish you luck this year. You are going to need it if you live in Ireland.